The Bank of Canada raised the overnight rate to 0.75% from 0.50% at their monetary policy meeting today. The Canadian dollar strengthened broadly against its major counterparts as a result and USD/CAD is seen trading lower by about 200 points shortly after the meeting.
The move from the BoC has been somewhat sudden as policymakers were reluctant to remove the option to cut rates further only a few months ago. In addition, the BoC had been cautious towards the start of the year, citing concerns over NAFTA trade negotiations and an overheating housing market.
Governor Poloz stated that about 75% to 80% of Canadians are locked into a fixed rate mortgage and that today’s interest rate hike should not have a drastic impact on mortgage holders. He also stated that investment in Canada is less than it would be if trade uncertainties were not present, however, people have moved past it and the Bank has seen stronger investment.
When asked about inflation, Poloz responded that the Bank should be forward-looking and anticipate levels of inflation down the road in determining monetary policy action.
Regarding forward guidance on future rate hikes, the BoC did not comment but Poloz made a very general statement that he expects rates to move higher.
When asked about oil prices, Poloz responded that there is still some adjustment to the oil price shock but that the worst of the adjustment has taken place. He added that Bank expects oil prices to remain in the $40 to $60 zone and that companies have adjusted to this range.
The outlook for USD/CAD is somewhat mixed as the technicals point to a breakdown after the consolidation that took place in the past year. The fundamentals and correlations with oil prices suggest the exchange rate may be stretched at this point.
Ahead of the Bank meeting, the markets had nearly fully priced in today’s rate hike. Combined with the lack of forward guidance on when the Bank is looking to raise rates next suggests a limited scope for further gains in the loonie.
The correlation between the loonie and oil prices has been diverging since the BoC initially provided the heads up in June that they were considering raising rates. The correlation has extended over several decades and divergences as a result of monetary policy have been temporary in the past.
The technical outlook for USD/CAD, however, provides no evidence of exhaustion and is hinting of a broader decline. The momentum in the decline from the high posted in May compared to the momentum of the 1-year consolidation that took place prior to that suggests the pair has resumed within the downtrend that started in early 2016.
USD/CAD was last seen trading at 1.2715 for a loss of 1.54% on the day. Support at 1.2720 comes into play which is a respected level on a monthly chart. The pair is also testing the lower bound of a declining trend channel that has contained price action since late June.
A failure to hold above support shows the next major area of interest at 1.2538 which is a respected level on a weekly chart that triggered the turn higher in April 2016.